announced it plans to go public with a Securities and Exchange Commission filing on Aug. 15 that states an intention to raise up to $100 million, but that number is usually used as a placeholder on an initial filing and is subject to revision. The company specializes in a cloud-based network platform that promises security, enhanced performance of business-critical applications, and “eliminating the cost and complexity of managing individual network hardware.”
Goldman Sachs, Morgan Stanley and J.P. Morgan are among the underwriters, and the company plans to list under the ticker “NET” on the New York Stock Exchange.
Here are five things to know from the company’s filing.
Cloudflare sees itself ahead of the curve compared with many big players
The San Francisco-based company said its service blocks 44 billion cyber threats from 20 million internet properties daily, and that it is better suited to today’s cloud environment. Security patches are no longer hardware-based “Band-Aid boxes,” and even if they were, they would be incapable of scaling and are largely incompatible with cloud-based architectures.
“This is forcing a major architectural shift in how enterprises address security, performance, and reliability at the network layer,” Cloudflare said. “The functionality provided by companies such as Cisco Systems
Riverbed Technology and others is being elevated, abstracted and unified into the cloud.”
“This transition has created a vast opportunity both in expanding the market to address underserved businesses and replacing Band-Aid box vendors, and the budget spent on their increasingly obsolete devices, in the enterprise,” the company said. “Cloudflare is leading this transition.”
Expenses are outpacing revenue growth
In 2018, Cloudflare reported a loss of $86.1 million on revenue of $192.7 million, compared with a $10.7 million loss on revenue of $134.9 million in 2017. So while revenue grew 43%, expenses skyrocketed 711%. That appears to have been due to a big jump in general and administrative expenses, which jumped to $85.2 million in 2018, from $20.3 million in 2017
“We expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support our growth as well as due to additional costs associated with legal, accounting, compliance, insurance, investor relations, and other costs as we become a public company,” Cloudflare said in its filing.
A growing unicorn
Back in 2012, Cloudflare was already valued at $1 billion based on $72 million in funding, according to The Wall Street Journal. Since then, the company received $150 million in Series E funding from Franklin Templeton Investments in March, for 176,000 Class B shares and placement of Franklin’s Stanley Meresman on the board, pushing the valuation to $3.1 billion, based on $332.1 million in total funding, according to Crunchbase.
Early investors stand to make out like bandits, with lots of power
As is the case with many tech unicorns, Cloudflare is offering Class A shares in the IPO, which are currently dwarfed in number by Class B shares, which carry 10 votes compared with the one vote that a Class A share commands.
When Cloudflare had its Series A funding round in 2009, Pelion Ventures and Venrock invested a total of $2.1 million in the company. Should Cloudflare’s valuation come in at $3 billion, that would mean about $1 billion for Pelion and Venrock, or about 500 times their original investment. When it comes to voting power, Pelion Ventures has 20.6% of voting shares, and Venrock has 19.1%.
New Enterprise Associates, which invested $20 million in Series B funding in 2011, controls 22.7% of voting shares, which would come to about $681 million in a $3 billion valuation, or about 34 times the original investment. In 2015, Fidelity Investments put in $110 million in a Series D round for 14.3 million one-vote Class A shares.
In Cloudflare’s management, Chief Executive and Chairman Matthew Prince controls 19.8% of voting shares, and Chief Operating Officer Michelle Zatlyn controls 6.6% of voting shares.
The company can’t please everyone
Cloudflare dropped 8chan as a customer in August, condemning the unmoderated message board as “a receptive audience for domestic terrorists” following recent mass shootings, and this appears in the company’s “risk factors” section. Cloudflare noted that it was not the first time a customer elicited scrutiny after a violent attack.
“We also received negative publicity in connection with the use of our network by 8chan, a forum website that served as inspiration for the recent attacks in El Paso, Texas and Christchurch, New Zealand,” Cloudflare said. “We are aware of some potential customers that have indicated their decision to not subscribe to our products was impacted, at least in part, by the actions of certain of our paying and free customers.”
“Conversely, actions we take in response to the activities of our paying and free customers, up to and including banning them from using our products, may harm our brand and reputation,” the company said. “Following the events in Charlottesville, Virginia, we terminated the account of The Daily Stormer. Similarly, following the events in El Paso, Texas, we terminated the account of 8chan. We received significant adverse feedback for these decisions from those concerned about our ability to pass judgment on our customers and the users of our platform, or to censor them by limiting their access to our products, and we are aware of potential customers who decided not to subscribe to our products because of this.”
Some eight months after it was reported that Ping Identity’s owners Vista Equity had hired bankers to explore a public listing, today Ping Identity took the plunge: the Colorado-based online ID management company has filed an S-1 form indicating that it plans to raise up to $100 million in an IPO on the Nasdaq exchange under the ticker “Ping.”
While the initial S-1 filing doesn’t have an indication of price range, Ping is said to be looking at a valuation of between $2 billion and $3 billion in this listing.
The company has been around since 2001, founded by Andre Durand (who is still the CEO), and it was acquired by Vista in 2016 for about $600 million — at a time when a clutch of enterprise companies that looked like strong IPO candidates were going the private equity route and staying private instead.
But more recently, there has been a surge in demand for better IT security linked to identity and authentication management, so it seems that Vista Equity is selling up. The PE firm is taking advantage of the fact that the market’s currently very strong for tech IPOs, but there is so much M&A in enterprise right now (just yesterday VMware acquired not one but two companies, Carbon Black for $2.1 billion and Pivotal for $2.7 billion) that I can’t help but wonder if something might move here too.
The S-1 reveals a number of details on the company’s financials, indicating that it’s currently unprofitable but on a steady growth curve. Ping had revenues of $112.9 million in the first six months of 2019, versus $99.5 million in the same period a year before. Its loss has been shrinking in recent years, with a net loss of $3.1 million in the first six months of this year versus $5.8 million a year before (notably in 2017 overall it was profitable with a net income of $19 million. It seems that the change is due to acquisitions and investing for growth).
Its annual run rate, meanwhile, was $198 million for the first six months of the year, compared to $159.6 million in the same period a year ago.
The area of identity and access management has become a cornerstone of enterprise IT, with companies looking for efficient and secure ways to centralise how not just their employees, but their customers, their partners and various connected devices on their networks can be authenticated across their cloud and on-premise applications.
The demand for secure solutions covering all the different aspects of a company’s IT stack has grown rapidly over recent years, spurred not just by an increased move to centralised applications served through the cloud, but also by the drastic rise in breaches where malicious hackers have exploited vulnerabilities and loopholes in companies’ sign-on screens.
Ping has been one of the bigger companies building services in this area and tackling all of those use cases, competing with the likes of Okta, OneLogin, AuthO, Cisco and dozens more off-the-shelf and custom-built solutions.
The company offers its services on an SaaS basis, covering services like secure sign-on, multi-factor authentication, API access security, personalised and unified profile directories, data governance and AI-based security policies. It claims to be the pioneer of “Intelligent Identity,” using AI to help its system analyse user, device and network behavior to better identify potentially malicious activity.
As a company grows, it must improve its systems of management and reporting. Public or private, there is no getting around this fact
3 min read
Opinions expressed by Entrepreneur contributors are their own.
CEOs of successful businesses may eventually have to choose between two different avenues to fund the future growth of their company. Either they sell the parts (or all) of the company privately, or they launch it onto public markets via an initial public offering (IPO).
Experienced leaders, however, will tell you these two alternatives have more in common than most people think. There are three assumptions about IPOs that are flat out wrong. Preparing a company for an IPO does not necessarily require more work than selling the company outright to a private buyer. Here are the three most common myths.
1/ Public Companies Face Much Higher Governance Requirements
The first incorrect assumption is that public listed companies must cope with much more exacting standards of governance. CEOs might reject a public offering to postpone having to improve their internal practices.
That would be a mistake. Publicly traded companies do indeed have strict corporate governance obligations. What is not true is that CEOs of private companies can take governance lightly.
Governance helps to determine every company’s performance. CEOs have to balance the risk and returns that comes with adopting or ignoring particular requirements. A private investor may have a higher risk tolerance for looser practices, but that risk still needs to be managed with care and transparency.
2/ For Public Companies, Quarterly Targets are more Important than Long-Term Sustainability
Should leaders of public companies shorten their aim from strategic targets to hitting short-term milestones? Do private investors always have a longer-term outlook? The answers are “no” and “no”.
An entrepreneur should never engage in shaping their business to what they imagine the capital market wants by emphasising short-term gains. Ultimately, this kind of behaviour can create pressure which will result in the wrong decisions being made. It sacrifices good management at the altar of current results.
This is not naiveté. Focus on true sustainability rather than short-term milestones to succeed in every business environment over the long term.
3/ Private Companies have much easier Reporting Requirements
Many startup CEOs believe that going public means signing up for spending more of their time on reporting than on managing. This, too, is wrong.
Fast-growing companies whose success has catapulted them into another level of business must step up their reporting — whether or not they go public. Not every company acts on this necessity as as fast as they should. Many fail to do so until the IPO process make it unavoidable. Even so, it is growth rather than the IPO itself that makes the improved reporting necessary.
As a company grows, it must improve its systems of management and reporting. Public or private, there is no getting around this fact.
Public companies actually have an advantage in this respect. Stock markets require a specific structure of reporting that is well understood. It may even be easier to follow than the many different requirements imposed by each private investor.
IPOs and private sales are so interchangeable that companies can take the dual-track approach of simultaneously preparing for both. It is common for an acquirer to swoop down and buy a company just before its offering goes public.
Here is the advice every CEO should follow. Never obsess over either type of exit. Do not dress up your business for anyone, whether the capital markets or a strategic investor. Instead, spend your energy building a long-term sustainable business with a strong and growing asset base. That will have the best payoff, financially and personally, no matter how you exit.
Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by New Residential Investment Corp. (NRZ). Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.
For a total of 10M shares issued, the total gross proceeds to the company are $250M. You can find some relevant information about the new preferred stock in the table below:
New Residential Investment Corp. 7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NYSE: NRZ-B) pays a fixed dividend at a rate of 7.125% before 08/15/2024 and then switches to a floating rate dividend at a rate of three-month LIBOR plus a spread of 5.64%. The new issue bears no S&P rating, pays quarterly dividends, and is callable as of 08/15/2024. Currently, the new IPO trades close to its par value at a price of $25.05. It has a 7.11% Current Yield and a YTC of 7.08%. The dividends paid by this preferred stock are not eligible for the preferential 15-20% tax rate on dividends. They are also not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” Current Yield and YTC would be 5.93% and 5.90%, respectively.
Here is the product’s Yield-to-Call curve:
New Residential Investment Corp. (NRZ) is a publicly traded real estate investment trust (“REIT”) that focuses on investing in, and actively managing, investments primarily related to residential real estate.
We aim to drive strong risk-adjusted returns primarily through investments in (I) Excess Mortgage Servicing Rights (“MSRs”), (II) Servicer Advances, (III) non-Agency residential mortgage backed securities (“RMBS”) and associated call rights.
Our objective is to leverage our proven investment expertise to deliver attractive returns that will help drive strong and growing dividends to our shareholders. We target assets that generate stable long term cash flows and employ conservative capital structures to generate returns throughout different interest rate environments.
Over the last few decades the complexity of the market for residential mortgage loans in the U.S. has dramatically increased. We believe that unfolding developments in the approximately $21 trillion U.S. residential housing market are generating significant investment opportunities. For example, in the aftermath of the U.S. financial crisis, the residential mortgage industry is undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. These changes are creating a compelling set of investment opportunities. We believe that New Residential is one of only a select number of market participants that have the combination of capital, industry experience and key business relationships we think are necessary to take advantage of this opportunity.
New Residential was formed as a wholly owned subsidiary of Newcastle Investment Corp. We were subsequently spun off as a separate publicly-traded entity on May 15, 2013. We are externally managed and advised by an affiliate of Fortress Investment Group LLC and benefit from the resources of a highly diversified global alternative investment manager.
Below, you can see a price chart of the common stock, NRZ:
For 2018, the common stock paid a $2.00 yearly dividend. With a market price of $14.52, the current yield of NRZ is at 13.77%. As an absolute value, this means it pays out $830M in yearly dividends. For comparison, the yearly dividend expenses for all outstanding preferred stocks (with the newly issued Series B Preferred Stock) of the company is around $27.94M.
In addition, the market capitalization of NRZ is around $6.15B.
Below, you can see a snapshot of New Residential Investment Corp.’s capital structure as of its Quarterly Report in June 2019. You can also see how the capital structure evolved historically.
As of Q2 2019, NRZ had a total debt of $7.3B, ranking senior to the newly issued preferred stock. The new Series A preferred stock rank is junior to all outstanding debt and equal to the other future preferred stock of the company. At this point, NRZ-B is the company’s second preferred stock after NRZ-A, issued on June 25 (which is also the reason why it does not fit into the Q2 report).
The Ratios Of NRZ Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of NRZ but to find out if its new preferred stock has the need quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders.
Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
Market Cap/(Long term debt + Preferreds). This is our main criteria when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 6,150/(7,300 + 285) = 0.81, indicating the company’s liabilities are slightly larger than its equity but generally the ratio is satisfactory as there is almost enough to cover all its debt and preferred stocks.
Earnings/(Debt and Preferred Payments). This is also quite easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the 2018 financial results is 964/(606 + 28) = 1.52, indicating significant buffer for the preferred stockholders and the bondholders, so to be calm about the payments. Moreover, the company manages to pay more than $800M dividend expense for its common that is junior to its liabilities.
The New Residential Investment Family
NRZ has one more outstanding preferred stock: New Residential Investment Corp 7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (NRZ.PRA). Some more information about the issue can be found in the following chart:
Like the newly issued Series B Preferred Stock, NRZ-A pays a fixed dividend at a rate of 7.50% before 08/15/2024 (its call date) and then switches to a floating rate dividend at a rate of Three-month LIBOR plus a spread of 5.802%. Actually, NRZ-A and NRZ-B share the same call date, as the only differences between the two are the current nominal yield and the eventual LIBOR spread, as the “A” is higher with respect to both. With the current market price of $26.16, the Series A Preferred Stock has a 7.17% Current Yield and a 6.40% Yield-to-Call. If we compare the two issues, we can see them sharing the same Current Yield, but with a Yield-to-Worst of 7.06%, NRZ-B seems to be better than its “older brother”.
In addition, in the following chart, you can see a comparison between NRZ-A and the fixed-income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). Due to the short history of the preferred stock, any meaningful conclusions can hardly be made, so this is for an informational purpose only.
All REIT Preferred Stocks
Below, you can see two charts with a comparison between all fixed-to-floating preferred stocks with a par value of $25, issued by a REIT company. It is important to take note that none of these preferred stocks is eligible for the 15% federal tax rate.
By Yield-to-Call and Current Yield
By Years-to-Call and Yield-to-Call
The higher the YTC, the better the security. With its 7.06%, NRZ-B is located somewhere in the middle. Of course, part the preferred stocks in this group have a more distant call date making them less attractive. Except for, NLY-G and NYMTN that are trading below par value, for the rest securities of this group, it is the Yield-to-Worst.
Here is the full list:
The next chart displays all preferred stocks issued by mREITs by their % of Par value and Current Yield.
Source: Author’s database
Fixed-to-Floating Preferred Stocks
This section contains all preferred stocks that pay a fixed-to-floating dividend rate and has a par value of $25. JE-A is excluded due to the recent swift fall that has driven the preferred stock into a Yield-to-Call of 44%, caused by the Just Energy’s (JE) earnings missing, revenue guidance, and suspending the common stock dividend.
By Years-to-Call and Yield-to-Call
Source: Author’s database
By Yield-to-Call and Current Yield
Source: Author’s database
Special Optional Redemption
Upon the occurrence of a Change of Control (as defined below), the Issuer may, at its option, redeem the Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control occurred, for cash at a redemption price of $25.00 per share of Preferred Stock, plus any accumulated and unpaid dividends thereon (whether or not declared) to, but excluding, the redemption date, without interest. If, prior to the Change of Control Conversion Date (as defined below), the Issuer has provided notice of its election to redeem some or all of the shares of Preferred Stock (whether pursuant to its optional redemption right described above or this special optional redemption right), the holders of the Preferred Stock will not have the Change of Control Conversion Right.
We estimate that the net proceeds from our sale of the Series B Preferred Stock in this offering will be approximately $241,875,000 (or $278,193,750 if the underwriters exercise their over-allotment option to purchase additional shares of the Series B Preferred Stock in full) after deducting the expenses of this offering and the underwriting discount. We intend to use the net proceeds from our sale of the Series B Preferred Stock in this offering for investments and general corporate purposes.
Addition to the iShares Preferred and Income Securities ETF
With the current market capitalization of the new issue of around $250M, NRZ-B is a possible addition to the S&P US Preferred Stock iShares Index during some of the next rebalancings. If so, it will also be included in the holdings of the main benchmark, PFF, which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities. I’ll just remind you about the last year rally in the fixed-income borne from the redemption of the two “giants” HSEA and HSEB and the released cash of over $600M used from PFF to buy more of the rest of its holdings.
As fixed-income traders, we follow every one preferred stock or baby bond, which is listed on the stock exchange. As such, NRZ-B is no exception, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market.
The company is well leveraged, having 0.81 equity-to-debt ratio. Also, the net income coverage is also very decent. With a $6.15B market cap, NRZ is one of the biggest mREITs and with the $830M common stock dividend, it is 30x times more than what it will be paying to the preferred stockholders. As for the returns, NRZ-B does not have the highest yields, when we compare it with all other F2F preferreds issued by a REIT. With Yield-to-Call of 7.06%, it is positioned in the with one of the highest by this indicator. If we take a closer look at the issues that are with the nearest call dates, CIM-D, PMT-A, PMT-B, XAN-C, CHMI-B have a comparable YTW, but these companies, CIM, PMT, XAN, CHMI are a lot smaller companies with quite worse debt-to-equity ratio. So, this 7.06% does not look bad at all. Overall, I consider the new IPO as a good mREIT’s preferred stock.
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Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Investors are vying for a piece of plant-based alternative meats producer Impossible Foods Inc. before the startup goes public, anticipating that its debut will draw market interest similar to that of rival Beyond Meat Inc.
Impossible Foods’ shares have seen a flurry of transactions in the secondary market that have valued the private company as high as $5 billion, brokers handling such sales said. Investors are making a bet that the company will either go public or get acquired at a higher share price, and are rushing to…
It hasn’t been a great year for unicorns. It could be an even worse one for WeWork.
Unicorns is the term used for startups with private valuations north of $1 billion. Some of the most highly valued among them, Lyft, Uber, and Slack, have all gone public in recent months, only to see their stocks fall soon thereafter and largely stay below their initial prices.
The next jumbo-size unicorn in line to go public is WeWork. And its post-IPO stock performance could be even worse than its predecessors — assuming it’s even able to go public at all, Scott Galloway, a professor of marketing at New York University and former startup founder, said.
“This might be the first unicorn that doesn’t get out,” Galloway said.
In other words, demand for WeWork’s shares might be so tepid among the institutional investors who actually take the first stakes in companies during an IPO that the company — or its bankers — might decide not to go public after all. Assuming demand is that weak, that may be its only option other than to accept a massively discounted market capitalization in the public markets relative to its $47 billion private valuation.
But among the biggest problems facing WeWork’s offering is its valuation, Galloway said. The company was valued at $47 billion as of the close of its last funding round in January. Given its business model, its huge obligations, and all the other challenges and red flags it faces, the company isn’t rationally worth anywhere close to that, Galloway said.
WeWork’s jumbo-size private valuation is a huge problem
Analysts might be able to make the case that WeWork might eventually be worth $10 billion, but right now, Galloway said, “it is very difficult to find, in my view, any argument that this thing is worth more than $5 billion.”
That means that if WeWork ends up going public at anywhere close to its last private valuation, it could be in for a steep fall, he said. While Uber and Lyft have dropped from their IPO prices, and Snap lost a massive amount of value after it went public, their value destruction could pale in comparison to WeWork’s. Assuming that WeWork went out with a valuation of around $47 billion, it could lose $40 billion in value, Galloway said.
“You’re going to see a destruction in value here on a gross level that could be unprecedented in the marketplace … in recent memory,” he said. “You haven’t seen that sort of value destruction,” he added, “since … the dot-com destruction” of the early 2000s.
To be sure, WeWork has not yet specified the valuation it will seek when it sells shares in its IPO. It’s possible that WeWork could list at a lower valuation than the $47 billion it commanded in its last private-market funding, though that would be a fairly unusual move that most companies try to avoid.
If WeWork does try to IPO at a $47 billion valuation, Galloway isn’t the only one who thinks it will have a tough time convincing investors it’s worth that much.
That valuation is nearly 26 times greater than its sales for last year. That’s much greater than the price-to-sales values of Lyft or Uber when they went public, said Daniel Morgan, a longtime tech investor and a senior portfolio manager at Synovus Trust. And the poor post-IPO performances of those once high-flying unicorns have almost certainly left a bad taste in the mouths of investors, Morgan said.
“They’re definitely stretching the bar on valuation,” Morgan said of WeWork. “They’re probably going be met with some skepticism here in the next couple weeks,” he added, “when they start pitching their wares” to potential investors.
The three IPOs will make liquid a huge slice of wealth that has been locked up for some time. But the Unicorn Leaderboard lists hundreds and hundreds of companies. Knocking three off the list won’t even get a full percent of the companies exited. And I’d guess that the market is still birthing unicorns far faster than it is finding exits for them.
The backlog of unicorns that need an exit is, therefore, getting longer, not shorter. The current IPO dearth is an easily spotted facet of the problem, helpful in illustrating what we called the unicorn IPO traffic jam back in 2016. This has been an issue for some time.
If Not Now
A question I keep asking myself as I watch unicorns continue to not go public is whether they are too immature to do so (some, certainly), or if the companies in question are simply happier staying private as they have continued access to capital (some, certainly). It’s hard to tell which category is more popular from a distance, however.
Many companies are taking a risk by not eating their lumps and going public in the current window. Cloud valuations are still high, IPOs are performing well, and public investors still value growth over profit. Those conditions do not have to hold, even if markets stay highly valued in aggregate.
Waiting is a gamble that unicorns are taking by not going public. I do not understand it, but that’s probably why I’m a reporter and not a founder.1
WeWork’s public debut is on the way, but questions are lingering about the company’s structure and its financials. Axios Business Editor Dan Primack and Dan Morgan, vice president and senior portfolio manager at Synovus Trust, join “Squawk Box” to discuss.
Like most companies that decide to take the step from private to public, Lyft (NASDAQ:LYFT) comprised a lock-up stage in its IPO terms that forbid company insiders including management, employees, and pre-IPO investors from selling their holdings for 180 days after its IPO date. The lock-up was originally planned to last until Sept. 24, however, Lyft stated in its recent quarterly report they decided to move the date forward to Aug. 19, as the original date with a standard “blackout” period that limits trading before the end of the quarter.
The “lock-up” period is usually 180 days for an IPO. The purpose is to prevent a flood of shares from existing shareholders immediately following the offering. The lockup agreement is negotiated between the underwriters, the company, and shareholders. The underwriter has the right to release the lock-up earlier than 180 days if it wants to (for example to facilitate a secondary, or “follow-on” offering.)
After the lock-up, Lyft projects nearly 258 million shares of its Class A common stock will become eligible for trading. Lyft’s two co-founders, John Zimmer, and Logan Green, and its Chief Financial Officer Brian Roberts collectively own about 5.6% of Lyft’s stock, and they told equity analysts they’re not planning to sell when the lock-up stage ends. This still leaves a plethora of shares to flood the market, which could put downward pressure on Lyft’s stock price.
Image Source: Lyft
Lyft went public in late March debuting around $72 per share, and it has since fallen roughly 27%, closing the end of last week at $52.47. However, most pre-IPO shareholders are still looking to lock down substantial gains. The company’s initial investors originally bought in for less than $1 per share. Over the course of its Series D funding round in April 2014, Lyft priced its shares around $10 or less, which is far below its current declining share price.
However, later-stage private investors are slightly more anxious. Investors in the company’s final private funding round, which Lyft’s IPO filing identified as “entities affiliated with Fidelity Management & Research Company,” bought shares priced at $47.35 in June 2018, just 10% below where the stock closed last week.
Between the two illustrious ride-hailing unicorns, Lyft was first to go public, which means it will also be the first to see its lock-up stage expire. The two have both drastically disappointed so far, with Uber(NYSE:UBER) going public in May. Both company’s share prices have submarined well below their IPO prices
Uber has felt the post-IPO sell off sharply. Last week, shares closed at $35.23, 22% below its $45 IPO price. At first glance, that may appear to be better than Lyft, yet the main distinguishing factor as to why it is not better is that Uber priced near the basement of its IPO range, to begin with. Uber sold shares at a discount compared to the price it yearned for, and it has since traded at an even larger discount. Many later-stage Uber investors are underwater as a result. Investors in Uber’s various Series G rounds including Saudi Arabia’s Public Investment Fund, Didi Chuxing, and Softbank, bought in at $48.77 per share. That ended up being more than Uber’s IPO price, and now represents a nearly 40% premium on the company’s current trading price. Meanwhile, investors in the Series E round are toying with the line between making and losing money. They paid $33.32 each, a figure Uber traded on either side of last week.
James Cordwell, an analyst for Atlantic Equities, said lock-up expirations can be a good day to buy a stock. “With Lyft we’ve certainly seen the selling pressure—the stock’s down over 20% since mid-July — and time will tell whether Monday will have been a good buying opportunity.”
What does this mean for investors?
Both of the two major ride-hailing companies stocks are drastically underperforming. Between the two, however, Lyft is looking more promising than Uber for the time being. Uber will only continue to frustrate shareholders, and Lyft appears to have settled into a place where it could eventually grow. Between the two, Lyft is the better buy, but neither are too impressive at the moment. Hindsight is always 20/20, but between the two, Lyft is the stronger buy.
In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Abi Malin shed light on some of the latest market news.
Shares of Estee Lauder (NYSE:EL) popped on a fantastic earnings report, and the long-term picture looks bright for the company. The negative press around Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) were soft sighs compared to the news around the soon-to-be-public WeWork. Is there anything of value for retail investors in this remarkably inflated IPO? Where does this real-estate-but-somehow-tech IPO fit into the tapestry of 2019’s massive and many IPOs? And Abi weighs in on a listener question about teaching investing to girls versus boys. Tune in to find out more!
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on Aug. 19, 2019.
Chris Hill: It’s Monday, Aug. 19. Welcome to MarketFoolery! I’m Chris Hill. With me in studio today to kick off the week is Abi Malin. Thanks for being here!
Abi Malin: Thanks for having me!
Hill: We’re going to talk WeWork because everyone in our office and seemingly in the financial media can’t seem to stop talking about WeWork. So we’re going to join in that conversation. We’re also going to dip into the Fool mailbag.
Let’s start, though, with a company I think we’ve talked about maybe once or twice before in all the years we’ve been doing this show, and that’s Estee Lauder. Looking at what Estee Lauder is doing, it seems like a stock we should be following more closely because shares are up 9% today, hitting a new all-time high. Fourth quarter results for Estee Lauder look good, and their guidance for the new fiscal year was also pretty impressive.
Malin: Yeah, I think that’s true. Sales were up 9%. This is known to be a pretty conservative management team so anytime they tend to be pretty bullish, everyone tends to take notice because they tend to outperform that. Definitely worth watching.
Hill: For those unfamiliar, Estee Lauder, all manner of cosmetics, skincare —
Malin: More than 25 prestige brands across 150 countries and territories.
Hill: Wow! I didn’t realize the footprint was that big. A company that we do talk about in this space is Ulta. Clearly, I’m showing my ignorance here — is it safe to assume that Estee Lauder is selling into Ulta? Is it one of those things where they’re retailer agnostic?
Hill: So, is this a stock that has ever been on your radar? We were chatting right before we started taping, and I realized, I don’t think this has ever been recommended in any service that The Motley Fool has. And the stock’s just been a monster, particularly the last few years.
Malin: It has. I think it’s a really interesting company. I talk about LVMH a lot. I like following that company.
Hill: What is that name?
Malin: LVMH. It’s a French conglomerate — Louis Vuitton Moet Hennessy. A bunch of the very high-end fashion, food, and beauty products. I think this is a really interesting company. I’m surprised it actually doesn’t get more traction. I think everyone acknowledges that there’s a lot of growth in this beauty space and within beauty, particularly in skincare, and also within the Chinese region, or Asia Pacific more broadly. But I think this is one that has been missed a lot by analysts around here, and I would like to see it covered in more places. It just doesn’t really fit into where I tend to look.
Hill: Last thing before we move on. You mentioned the management being pretty conservative. All things being equal, is that something you prefer to see as an analyst? Management being conservative, even if it’s just in terms of their guidance?
Malin: I think they are conservative because they’re so geopolitically diverse that they have a lot of risks that they’re always taking into account. I think anytime the market comes to expect something, you’re going to see a surprise at one point or another. This time, it was to the upside. There’s probably a reason that they’re conservative, and there’s probably going to be some time that they’re going to miss. When you set market expectations, it’s always a little bit hard. With that being said, I think conservative management in this business makes a lot of sense.
Hill: When I think about the end of 2019, and on Motley Fool Money, we’ll do an episode where we look back at the year, and what are the dominant storylines, I think it’s safe to say that one of the dominant storylines of 2019 is going to be the IPOs. Coming into this year, we, not only are we going to have some high-profile IPOs, we knew that they were going to be essentially front-loaded to the first half of the year because there was concern among, not the companies themselves, but also among the venture capital folks that were taking them public —
Malin: That we’re at peak valuation.
Hill: [laughs] Yeah. “We’re at peak valuations, let’s get out in the market.” Airbnb, Uber, Lyft, Slack, Pinterest, Zoom. Now we’ve got WeWork. I’m curious what you think. I think we’re now at the end. I think the WeWork IPO, if they in fact go public in September, and that is reportedly what they are targeting, I think that’s going to be it, basically, for IPOs for 2019. I have never seen such negative coverage about a company getting to go public.
Malin: Yeah. I think it’s multifaceted in this case. Something really funny — I think it was Bill Mann, but it might have been Tom Gardner. Someone around the office coined this “The We Won’t Work Company.” They’re talking about coming public at almost a $50 billion valuation. We’ve seen this happen with Uber and with Lyft and some of the other ones that have already come public. When you’re talking about numbers that big, a lot of the growth and the potential and the runway has already been used. Investors aren’t necessarily feeling like they’re getting in at the ground level. This is a just late stage. So, for one case, that’s a little bit unattractive on the size perspective.
The second thing here, they raised $11.8 billion in cumulative debt and equity funding, according to CrunchBase data, so it’s actually one of the most well-funded private companies in the market, ever. And when you think about what’s behind that, that’s a ton of venture capital money. That alone in and of itself is saying something. That’s bigger than most companies tend to even come public historically. There’s a lot at stake here. And I think layering on top of that, the business is a little bit flawed. In 2018, revenues were about $1.8 billion, and they had a loss of $1.6 billion. I mean, there’s something to be said for using capital while you have it and spurring growth, but I don’t think that real estate is necessarily quite the market that these founders would want you to believe it is.
Hill: Add in the fact that, as we talk about from time to time, when a company files to go public, and they’re pulling together their S-1 filing for the SEC, they are doing it with the mindset of, “We’ve got to make our numbers look as good as possible.” So, for whatever one thinks about WeWork, just know this is WeWork’s public document saying, “This is as good as it gets right now.” And there are a lot of people, including folks like you, who are looking at this and saying, “Really? This is as good as it gets? This isn’t very good.” And then, throw in on top of that, the management team… and the fact that there are going to be three share classes, right out of the gate. I think you can go with multiple share classes when you’re a proven business, when you have proven leadership —
Malin: I mean, Snap did it too, and they also got a little bit of flack for it.
Hill: Oh, yeah. Including on this show. [laughs] WeWork didn’t invent this.
Malin: Just, you don’t necessarily need to be a proven business. That’s my point in bringing that up.
Hill: That’s true. Good point!
Malin: The thing that’s actually pretty jaw-dropping in this case, even in comparison to Snap, which I would say had similar questions when they came public, similar management friction — although I would say this is much more grounded in numbers and facts than the Snap concerns were — WeWork has three share classes, as you mentioned. The B and C class are essentially owned primarily by Adam Neumann.
Malin: Yes. Founder, CEO. And those shares give him 20 votes per share. That gives him more than 50% of the total voting power. In comparison, a lot of other dual or even triple class structures, those shares have about 10 votes per share. So, he actually doubled the power in each share. As a shareholder you want to have a voice, and while maybe as a retail investor, you don’t expect to have a huge voice, there’s a clear strong message with that. This is his business, and he’s running it the way he’s going to want to run it.
Hill: Dylan Lewis said this on last Friday’s Industry Focus when they were talking about WeWork, and I’m going to say the same thing — we’re not trying to hate on them. Just as someone who watches the financial media, I’m marveling at the overwhelming negative response to this filing. By all means, if anyone listening has a strong bull case for why they think this is an IPO worth buying into, or the business in general, please email us, email@example.com.
Malin: We have to give credit where credit is due. This is an inventive idea. The idea of renting space the way that they’ve presented it actually makes a lot of sense for a lot of start-ups, a lot of small businesses. I think this is a cool concept. They pioneered it — at least, they get credit for bringing it to the main stage. I just don’t know that this business with this leadership team is the best execution of it.
Hill: It sounds like a “not with my money” situation.
Malin: Yeah. I guess what I’m saying is, I don’t hope against them, but I struggle to see… even with Uber, where I was a little bit negative, I felt like there was optionality there. And I still feel like there’s potential with a couple of aspects of that business. With this one, I feel like maybe even less clarity on how exactly we make this.
Hill: Our email address, as I mentioned, is firstname.lastname@example.org. Great question from Baiju Meda in Santa Ana, California. He writes, “I have two girls, ages eight and 10. I primarily invest in passive index funds. My two girls are not super interested in investing or stocks. We’ve talked about it and we tell them that we are investing for college, but it’s not something they ask much about. I use index funds because they are cheap and easy and I don’t have the time to research individual stocks. How do I explain that to children and get them excited about it? Even for adults, they’re pretty boring investments.” Well, he’s right about that. “Do you think the way you should teach your kids about investing should differ between boys and girls? I would love to hear Emily Flippen’s response to this as a millennial female. Thanks for all you do.” Thanks for a great question! I’ve got another millennial female here in the studio with me in Abi Malin. I love the recognition that index funds, being a wonderful investment vehicle that we love here at The Motley Fool, and always have, for the low cost, for the diversification that you get, and the recognition that yeah, that’s incredibly boring.
Malin: Yeah, I don’t think the idea of an index fund at age eight is going to get you super excited. But I do think the idea of compounding interest, and the idea that saving today can lead to increased purchasing power in the future, is the fundamental reason why people invest, whether that’s an investment in individual equities, index funds, or even bonds. I think for kids, particularly, you really want to teach that concept. So, start on a micro level with just one company, talking about how you build wealth by investing in this one share today, because it will be worth more in the future. And then, once they grasp the idea of opportunity, I would teach the second hand, which is risk. Learning one’s own risk tolerance, and then balancing that risk and rewards opportunity, is really the name of the game. The sooner you get kids thinking about both big opportunities and big downsides, you can get them a little bit more excited.
Hill: I want to come back to the companies in a second. What do you think of his second question? As someone with two daughters and one son, the way I’ve talked to my kids about investing has not differed among them. But, we were talking before we started taping, and you had a different take. Not necessarily that you should teach differently boys vs. girls, but how we’re in the environment that we’re in.
Malin: Right. I think this question is probably stemming because, when you look at the job market, there are so many fewer females in these financial roles in comparison to men. I think that’s due to a couple of reasons. The first is that finance is math-based, and research shows that girls start to doubt themselves in math and science-based subjects by middle school. There’s a lot of initiatives being made to correct this inherent bias. The second is that finance and stock markets and equity analysis, these particular subjects require a level of conviction that girls society are not taught the same way that we teach boys. There’s this really interesting book by Deborah Tannen called Talking from 9 to 5, and it’s about how girls are socialized to present ideas differently than men. Long story short, the research shows that women are actually better investors because they tend to be less reactive and hold through turbulent times. So, what that says to me is that women are more confident in the ideas after they pick them, it just takes a little bit longer and more research for them to get there in comparison to men, generally speaking.
So, if you want to get girls invested, I think you need to tackle both of those problems, and I think that comes down to a confidence issue. Teaching your girls that it’s OK to be wrong, here’s how you do good research, here’s how you build conviction, everyone makes mistakes, and giving them the leeway to do that, specifically targeted toward those gender issues, maybe.
Hill: Every investor makes mistakes.
Malin: Every investor makes mistakes.
Hill: To go back to the companies, my experience, I know Jason Moser has talked about this as well, my experience in investing with my kids is finding something they’re already interested in. Once you start to look at, if your kids are interested in sports, or video games, or whatever, chances are, there’s a public company that is making the products and services that they use every day, or that they and their friends are talking about. I’m not saying, “Hey, dump the index funds, go all-in on individual stocks based on what your eight year old says,” but maybe take, I don’t know, $50, $100, buy a couple of shares of a single company.
Malin: I think teaching them what’s in that index fund, because index is a weird finance term anyway that’s a little bit general. But if they understand, Nike‘s in the index fund, and Mattel, and McDonald’s, maybe it gets a little bit more curiosity.
Hill: Abi Malin, thanks for being here!
Malin: Thanks for having me!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery! The show is mixed by Austin Morgan. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!